1. Leveraging Official Sector Capital And Enhancing Financial Governance Local Debt Markets and Official Agencies Enhancing Growth Opportunities Sao Paulo, October 26/27, 2004

2. Table of Contents 1.Overview 2.Case Study: Mexico 3.Official Agency Solutions A.Multilateral: IFC Partial Guarantee B.Bilateral: FMO Partial Guarantee C.Export Credit Agencies: Bank Financing 4.Shortcomings Of Official Agency Solutions 5.Next Steps 1

3. 1 Overview

4. Topics for Discussion  The development of financial markets is an important stepping stone to achieving higher growth rates. However, the necessary steps to executing this development are difficult to define.  In recent years, some developing countries have been able to promote their local capital markets (particularly the debt markets). These examples help us to identify some of the key channels by which to further evolve a country’s economic potential.  Official Agencies have become active in local debt markets as they have witnessed the benefits that utilization of these markets creates.  Nonetheless, despite their flurry of activity to date, we view a more active roll for these Agencies in the local markets. It is important to continue to develop the role that Official Agencies play in local financial markets. THE DEVELOPMENT OF LOCAL FINANCIAL MARKETS IS ONE OF THE MOST SALIENT TOPICS TODAY IN INTERNATIONAL FINANCE. 2

5. Advantages of Local Debt Market Development  Financing of Long-Term Projects  Extension of the Yield-Curve  Reduction of Pressure on Government Budgets  Improved financial conditions for issuers  Reduction of vulnerability to FX fluctuations for Borrowers  Portfolio diversification for investors The benefits of financing debt through local markets are becoming clearly evident to all parties involved. Mexico is a useful example demonstrating both the advantages as they have unfolded and the issues as they have developed. THERE ARE SEVERAL ADVANTAGES TO THE DEVELOPMENT OF LOCAL DEBT MARKETS: 3

6. 2 Case Study: Mexico

7. Ever Trending Upwards… There is a clear trend indicating an ever increasing usage of the local debt markets in Mexico. LOCAL DEBT MARKETS IN MEXICO IN US$ MILLION 4

8. Underpinnings for a Local Market: Stability, Investors, and Laws  Central Bank Independence  Modern Bank Deposit Insurance  Financial modernization through foreign investment  Amendment to Securities Law  New Bankruptcy Law  Facilitation of bankruptcy remote schemes  Shelf- Registration  Disclosure requirement at international standards  Facilitation for Foreign issuers registration Stability at Systemic Level Enforcement of Property Rights and Minority Interests Expeditious and Transparent Issuance Process Legal Framework 5

9. Visible Benefits of a Local Capital Market 6

10. Important Challenge: Limited Number of Issuers One of the key difficulties in sustaining the momentum currently behind the development of the local financial markets is a distinct lack of issuers in the market. OUTSTANDINGS AS OF SEPTEMBER 2004 Total amount issuedAmount (USD MM)% of outstanding PEMEX2,841.04$ 14.0% América Móvil1,282.61$ 6.3% Cemex1,184.99$ 5.8% Ford Credit1,147.78$ 5.7% GMAC956.09$ 4.7% Coca Cola Femsa869.57$ 4.3% Hipotecaria Fed.846.31$ 4.2% CFE770.87$ 3.8% Telmex647.83$ 3.2% Bimbo565.22$ 2.8% Volkswagen473.11$ 2.3% Outstanding Sep 200420,291.00$ 57.1% 7

11. The Evolution of Structured Debt in the Local Markets 8

12. 3 Official Agency Solutions

13. A. Multilateral: IFC Partial Guarantee

14. Compartamos: The First Partial Guarantee by the IFC in the Mexican Capital Markets Transaction Highlights  Citigroup, through Banamex, was selected to arrange the financing for Compartamos’ request to structure a capital markets program that would fund the entrepreneurial efforts of thousands of Compartamos clients – 94% of them women – primarily in rural communities throughout Mexico.  A 34% guarantee from International Finance Corp (IFC), the private sector arm of the World Bank Group, enabled the five-year bonds to receive a AA local rating by the local affiliates of Standard & Poor’s and Fitch Ratings.  The first tranche of the program, for $190 million, was closed on July 30, 2004.  The financing was the first Mexican Peso transaction supported by the IFC.  The structure of the partial guarantee was designed to attract Mexican institutional investors including mutual funds, pension funds, and insurance companies. More than 10 institutional investors participated, which is comparable to other investment grade issuers.  The placement of bonds for Compartamos was arranged by Acciones y Valores de Mexico, S.A. de C.V. (Accival), the brokerage arm of Banamex.  The transaction had a tenor of 5 years, which was unprecedented for a micro-finance company in Latin America. Market Reaction  The availability of IFC support for this transaction in local currency has attracted widespread recognition within the Mexican business community. Innovations  First IFC partial guarantee supported deal in Mexican Pesos.  Milestone transaction for the micro-financing industry.  Citigroup/Banamex and the IFC helped Compartamos diversify funding sources as Compartamos focuses on achieving its growth plans, which include growing its customer base to one million clients by 2008. In July 2004, Citigroup, acting as Sole Lead Arranger closed the first tranche of a $50 million Mexican Peso local bond partially guaranteed by the IFC, to finance the expansion efforts of the company. Borrower:Financiera Compartamos, S.A. de C.V. (“Compartamos”) Facility: A MXN 500 Million local bond program, partially guaranteed by the IFC. Purpose:To fund the expansion needs of the company’s microfinance portfolio Closing Date:July 30, 2004Citigroup Role:Sole Lead Arranger Financiera Compartamos $500 million Mexican Peso Local Bond 9

15. Compartamos (cont.)  Issuer: Compartamos, Microfinancing Company  Amount: US$ 18 MM  Rating Agencies: Fitch and Standard and Poor´s  Tenor: 5 years amortizing  3 years grace period Issuer Benefits  Achieve longer tenor  Diversify funding away from retail investors and banks  Position the Microfinancing industry with institutional investors as a promising sector Investor Benefits  Diversify portfolio  Microfinancing Sector  Multilateral Agency Risk  IFC will monitor the transaction  Partial Guarantee provides correct incentives for Compartamos to pay 10

16. B. Bilateral: FMO Partial Guarantee

17. FMO Partial Guarantee  FMO provides unconditional and irrevocable partial credit support  The coverage represents 9% of the outstanding AAA class  The total amount of coverage decreases according to the amortization plan of the securities  In case the guarantee is ever used, the notional amount of the credit support freezes.  The total amount drawn is then converted into USD obligations  The Originators can be affected since they are subordinated to the FMO Benefits to the Issuer  Match funding for long-term assets  Able to tap institutional investors without being an investment grade company.  Capital relief from a mezzanine investor allows for continuous expansion of the business  Multilateral Agencies involvement provides international expertise and know-how Benefit to Investors  Diversify portfolio by investing in a AAA rating transaction  Obtain long-term assets to match long-term liabilities (insurance companies)  FMO Guarantee freezes in case the portfolio underperforms  AAA investors do not carry any currency risk since they are in a Senior Position The FMO partial guarantee is a useful tool to take advantage of local market resources. BELOW ARE THE CHARACTERISTICS OF THE FMO PARTIAL GUARANTEE: 11

18. Use of Partial Guarantees in Structured Transactions (MBS) 12

19. C. Export Credit Agencies: Bank Financing

20. ECAs: Guarantees of Locally Funded Bank Loans  First US Exim Bank supported deal in Mexican Pesos: USD 40 MM  Exim offered a discount in its Exposure Fee  The transaction was structured as a Bank loan, not as a bond issuance THE AEROMEXICO TRANSACTION PROVIDES AN EXCELLENT EXAMPLE OF ECA PARTICIPATION IN A LOCAL CURRENCY LOAN. 13

21. 4 Shortcomings of Official Agency Solutions

22. Shortcomings of Official Agency Enhancements for Local Currency Debt  Local Currency Reimbursement:  Official Agencies are limited in the currency risks they can take. In the absence of hedge alternatives, reimbursements eventually become hard currency liabilities.  Pricing of Guarantees is not favorable for local transactions:  Local rates are usually higher than US rates and issuers prefer to run the FX risk.  Pricing seems to be based on internal risk rating hurdle rather than market conditions.  Even if investors have an international AAA risk from Agencies, they will want to receive a premium.  Structuring costs are very high (e.g. use of international lawyers) for small and medium companies.  Governing Law  Official Agencies prefer to issue the guarantees under US or European law, but this is not always possible under local regulations.  Coverage  ECAs offer a higher portion of coverage than Multilaterals, but the eligibility criteria is far narrower.  Full coverage under Multilateral solutions should be sought. Despite the attractiveness of Official Agency solutions and their desire to help develop local capital markets, there are several issues which have contemplated the full implementation of local currency strategies. THERE ARE A NUMBER OF AREAS WHERE OFFICIAL AGENCY PROGRAMS NEED TO BE ENHANCED IF LOCAL MARKETS ARE TO DEVELOP FURTHER. 14

23. 5 Next Steps

24. Next Steps  Official Agencies have to reflect their awareness of the importance of local currency markets in the development of :  New Products (e.g. derivatives, commodities, asset-based transaction)  Favorable Pricing Schemes  Broader Eligibility Criteria  Agencies need to have a deeper interaction with local government officials to:  Promote Pension Funds Investments  Facilitate use of US or European Law in the Guarantees  Facilitate the access of Official Agencies to the local capital markets by adjusting local legislation (Securities Laws, Bank regulation, etc) If Official Agencies are able to act on certain crucial points in the near future, local markets will being to develop at a much faster pace. THE FOLLOWING ARE AREAS THAT DESERVE THE IMMEDIATE ATTENTION OF OFFICIAL AGENCIES IN ORDER TO MOVE LOCAL CURRENCY FINANCING INITIATIVES FORWARD. 15

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